(b)
Large-scale buying of the surplus by the board has prevented prices from collapsing for the following. As suggested from the data, there has evidently been a good harvest as farmers are able to supply more wheat.
QUOTE-“Farmers have offered to sell more than 400,00 tons….”
Hence this causes an outward shift in supply from S to S2 and theoretically the price of wheat should collapse as a surplus in supply should mean that to allow demand to increase and supply to decrease, to allow the surplus to be eradicated, the price of potatoes must fall. However the reason to why this doesn’t occur ie – the price does not fall to P1 at the point X is because to prevent this price fall, the Board has “artificially” bought up this extra supply of wheat. This artificially shifts the demand curve form D to D2 for the potatoes outwards, maintaining the price at a new equilibrium point of E2, at a chosen interventionist level of P2.
(c) Two problems that might arise in making surplus UK potatoes
available for consumption in Eastern Europe is as follows.
Due to technological advances, this means that the probability of a bad harvest is minimal. Therefore the likelihood of a good harvest each year is relatively high, which means that the Board are always buying up excess supply of agricultural produce such as potatoes, but never supplying it back onto the market. Hence there is an unnecessary build up of food. This means that Eastern Europe have a surplus of potatoes and so third world countries who are suffering and require food have to starve, whilst booming Eastern European countries have an abundance of food and do not require it, and so there are no benefits to either country.
Another problem is that the scheme used for potatoes is known as a buffer stock scheme, where by a combination of maximum and minimum price controls exist. However due to the lack of poor harvests, and an increase in occurrences of good harvest, it means that this system is purely devoted to a minimum price control, which stops the price of EU agricultural products such as potatoes from falling below a certain level. This means that food prices for EU shoppers are considerably higher than they should be.
(d) In the absence of a potato marketing board the situation that would exist is as follows. Due to the probability of harvest being good is high the following would happen.
If there were a good harvest, supply would increase from SS to S2S2. This is beneficial to the consumers as the price will fall to try and encourage demand to increase.
However because consumers are price inelastic to commodities such as potatoes, meaning that they are not really responsive to a price change in potatoes, the price fall will only increase the quantity of potatoes demanded by a very insignificant amount. This means that farmers lose more revenue than they gain, which can result in bankruptcy for the farmers, whilst the consumers benefit by the fall in price. To prevent this from happening a buffer stock scheme needs to be installed to benefit both consumers and producers.
In the unlikely event of a bad harvest the following would occur.
If there happened to be a bad harvest, supply would decrease from SS to S2S2. This is beneficial to the producers (farmers) as the price will increase to try and encourage demand to decrease.
This means that farmers gain more revenue than they lose which can result in benefits for the farmers and detriment for the consumers, as they have to pay a high price. To prevent this from happening a buffer stock scheme needs to be installed to benefit both consumers and producers.